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B R E A K I N G P R O M I S E S

JÁNOS KORNAI Professor of Economics Emeritus

Harvard University and Corvinus University Budapest

Lecture at the conference convened by the Pan-European University, Bratislava, February 8, 2013

Author’s email address: janos.kornai@uni-corvinus.hu The paper is available at the author’s website www.kornai-janos.hu

and at the Pan-European University’s website

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The structure of the paper

Introduction

Five types of breaking promises

Interaction

Moral judgment

Motives, incentives

Concluding remarks

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Five types of promises

A. Producers’ promises to users

B. Users’ promises to producers

C. Debtors’ promises to lenders

D. Government (central or local) promises to citizens

E. Political promises

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Interactions

• Spillover effects of breaking debt-promises: „chain-indebtedness”, „circular indebtedness”

• Non-performing bank-loans → fall in bank lending → recession

• Recession → fall in liquidity of households and companies → further breaking of promises

• Frequent breach of promises → effect on public mood

• Spreading of bad examples. „Epidemy”

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Public opinion: Do politicians keep their promises?

Country Ratio of citizens who doubt the reliability of politicians (per cent)

Country Ratio of citizens who doubt the reliability of politicians (per cent)

Italy 77.8% United States of America 51.1%

Latvia 67.4% Germany (West) 49.5%

Hungary 66.7% New Zealand 47.9%

Russia 65.1% Sweden 46.5%

Japan 61.0% Great Britain 46.4%

Spain 60.1% Australia 44.8%

Israel (Jews) 59.2% Canada 42.4%

Germany (East) 59.1% Cyprus 35.4%

Slovenia 56.6% Norway 33.9%

France 56.6% Switzerland 32.8%

Irelans 55.0% Philippines 30.8%

Czech Republic 52.7% Bulgaria 23.7%

Poland 52.5% Izrael (Arabs) 18.2%

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Circumstances to be considered

1. Bona fide commitment?

2. Careful considerations of potential difficulties before commitment?

3. Compensation if promise not kept?

4. Motivation for breaking the promise?

5. If fulfilment not feasible – harmful consequences minimized?

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Motives to fulfill or to breach promises

Moral incentives

Reputation

The enforcement of contract fulfillment by legal means

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Final conclusions

Central role of promises of politicians in multi-party electionsPolitical promises broken regularly

– undermines the foundations of democracy

Central role of enforcing private contractsEconomic promises broken regularly

– undermines the foundations of the market economy